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Cocoa Will Dip, Then Pop

Commodities Corner | SATURDAY, JULY 31, 2010

By DEBBIE CARLSON

Short-term, cocoa prices will be tepid, but longer term, they will heat up, given growing global demand for quality chocolates.

COCOA SUPPLIES SHOULD FINALLY rebound when the main Ivory Coast harvest begins in October. That could lead to near-term price weakness, but the longer-term picture remains solid.

Nerves in the cocoa market were frazzled in late July, on reports that U.K.-based hedge fund Armajaro had taken delivery of about 240,000 metric tons, some $1 billion worth, of cocoa from London's Liffe market, where there are no position limits. But the impact of that delivery was muted days later, when news reports said nearly half of the delivery most likely went to a chocolatier. Shawn Hackett, president of Hackett Global Advisors in Boyton Beach, Fla., says that when an end-user comes in, it sometimes indicates a top in a market.

Still, a less-than-robust harvest for the 2009-10 marketing year (which ends Sept. 30) in West Africa, the main source of the world's cocoa, has boosted prices to about $3,000 a metric ton on the ICE Futures U.S. contract this year. Restocking of depleted supplies by chocolate makers and other users has helped keep prices from cooling off.

The coming harvest should be ample enough to fill immediate gaps caused by last year's short crop. But rebounding demand and problems in the Ivory Coast may allow prices to break through and stay above the $3,000 barrier.

While October is two months away, good weather and a lack of disease should allow the Ivory Coast to produce about 1.1 million to 1.2 million metric tons—an average annual crop—for the 2010-2011 harvest, analysts contend, which should be ample supply. The West African nation produces about 35% of the world's cocoa, so chocolate makers live or die by the size of its harvest. A civil war in 2002-03 has left the country without an elected president, with elections repeatedly postponed. Sudakshina Unnikrishnan, an analyst at Barclays Capital in London, says the political instability has led to a lack of much-needed investment in the cocoa sector. Ivory Coast production is stagnant, held down by weak yields and aging trees.

If the Ivorian crop comes in as large as expected, Jack Scoville, an analyst at Price Futures Group in Chicago, says that the December ICE contract could slip to $2,800. Friday, nearby September ICE cocoa settled at $3,065, up 3.3% on the week. Supplies should be large enough to correct the market imbalance, and there could be a small surplus, he believes, which could mean prices could dip to $2,600 to $2,400 by the first part of the 2010-2011 year.

But James Cordier, portfolio manager for Tampa brokerage Optionsellers.com, says that, while short-term supplies will be ample, demand should rise. That makes him bullish to $3,500 on cocoa over the next six to 12 months. Chocolate consumption is growing in the emerging markets, especially China, India and Russia. Demand in Western nations is also improving after last year's recession. That's been reflected in cocoa-grindings data, which measure how many cocoa beans are processed into products like cocoa butter and cocoa powder.

The recession hurt dark-chocolate sales more strongly than those of less-expensive milk chocolate, Unnikrishnan says. Cordier says that if the U.S. economy improves, American consumers might buy more better-quality chocolates, which would mean more cocoa usage. Barclays is also bullish. It sees prices hitting $3,100 a ton during the current quarter and $3,150 in the following six months.

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